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All Eyes on Yellen as USDCAD in Lock Down Ahead of Speech

Published August 26, 2016
  • USDCAD continues its exhilarating sideways chop in a tight range around the 1.2900 handle ahead of a key speech by Fed Chair Janet Yellen at 10am ET
  • Will she continue to the relatively hawkish tone delivered by her colleagues of late? Or will she deliver a more balanced tone aimed at maintaining the Fed's neutrality and data dependence?
  • The title of her speech is "The Federal Reserve’s Monetary Policy Toolkit” and the theme is likely to touch on how the Fed will be able to counterbalance a recession amid a period of unprecedented low interest rates
  • Historically, the Fed has cut rates by an average of 550 bps during recessions in order to fuel lending and cushion the blow
  • With rates in the long term expected to stay closer to 3 – 3.5% there is much less room for them to support the economy with rate cuts and so unconventional tools such as forward guidance (when they would cut/hike rates) and quantitative easing (printing money to buy assets) come into play as viable long term options which the Fed will have to deploy going forward
  • These points are likely to be touched upon this morning by Janet Yellen; we are also hoping that she gives some guidance on the near term rate path
  • A hike before the US election in November seems improbable, however a hike in December may be more plausible
  • This morning, the US reported that Q2 GDP was revised down to 1.1% from 1.2% as expected 
  • However, the Fed's favoured inflation metric, Core PCE Prices, rose to 1.8% from 1.7%, a positive sign
  • As well, a large draw down on inventories in Q2 is estimated to have accounted for shaving 1.26% points of GDP; this could be an indicator of stronger consumer demand which accounts for roughly two thirds of US output
  • Yellen speaks at 10am ET which coincides with August's final Consumer Sentiment Index from the U of Michigan, so we could some out sized moves across FX markets this morning
  • Oil is flat on the day at $47.45 a barrel and equities in the US and Canada are expected to open flat but that could change quickly once Yellen's speech hits the tape

Charts: (1) USDCAD back to range trading as uptrend broken – need to get above 1.2930 short term and 1.3000 medium term for bulls to take over. (2) Economic Calendar is dominated by the US this week.